Industry needs crude oil price of $70-barrel, says Shell chief after mega-merger with BG Group

Shell oil barrelsBy DARA BUTTERFIELD

Shell Chief Executive Ben van Beurden has declared that within a decade crude oil prices will have to rise to “at least $70-barrel in order to just break even”.

Speaking after Shell proposed £47 billion mega-merger with BG group was announced, van Beurden stressed heavily that the merger was “not a bet on the oil price”. While answering questions he laid out his – and Shell’s – view for the future of oil prices.

He said:  “You have to consider a few things if you want to take a view on the long term oil price:

“First of all you have to bear in mind that demand – even in relatively, lets say, challenged economic conditions – demand for oil will continue to grow. Global GDP would have to come down right to 2% or less for oil demand to stay flat, so think for now that 1% so 1 million barrels a day growth per year, should be the normal minimum almost.

“On top of it you have to bear in mind that production from existing fields declines, this is a natural phenomenon, typically it declines on average 5% per year – again 5 million barrels per day decline just from natural causes and of course, with the cutback in investment that we now see across the board that may actually accelerate.

“So here we are looking at 6 million barrels per day of gap opening up between supply and demand which of course can be filled with spare capacity and shale and everything else and of course there is a little bit of overcapacity at the moment at this point in time, less than 1 million barrels per day.

“But fast forward this now to the end of the decade and now you will see that the industry has somehow collectively have to put another 25 million barrels a day of new capacity on. There is no way this can come from shales or from spare capacity or OPEC or Iran or wherever. This have to come from major new investment programmes.

“If you then take a view on how the supply curve looks like in terms of cost of supply we will be looking at least at $70 oil in order to just break even. And that is with 20% cost reduction from todays price levels.

“How we will get there, when we will get there, whether we will overshoot, whether geopolitical events or other things will make this an interesting or a normal dynamic – I don’t know, but I don’t need to know. The only thing I do know, in the rest of the decade, supply and demand fundamentals will reassert themselves.”

The proposed mega merger would add some 25% to Shell’s proven oil and gas reserves and 20% to production, making Shell the second largest oil major behind Exxon Mobil.

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